Big Inflation in Canada hidden by Steep Fall in Natural Gas Prices

Posted by PITHOCRATES - May 20th, 2012

Week in Review

Canada is doing energy right.  They’re pulling it out of tar sands and shale.  And bringing it to market.  To meet real demand.  For energy is the mighty Atlas of the Canadian economy.  Carrying the rest of the economy along on its broad shoulders.  Because it’s solid economic growth.  And the only part of the economy they’re NOT driving with monetary policy (see Inflation increase in April fueled by gas, car prices by Randall Palmer, Reuters, posted 5/18/2012 on The Vancouver Sun).

Inflation in Canada was slightly higher than expected in April, pushed up in part by gasoline prices, providing the Bank of Canada with more reason to launch the interest-rate hike it has hinted at recently.

On an annual basis, the overall inflation rate rose to two per cent in April from 1.9 per cent in March, Statistics Canada said on Friday. The core rate, which excludes volatile items, climbed to 2.1 per cent from 1.9 per cent…

The median forecast in a Reuters survey of analysts had been for both inflation measures to stay at 1.9 per cent. Only five of 24 analysts had expected the overall rate to rise, and none had foreseen a core rate as high as 2.1 per cent.

Interesting.  Only 5 Keynesian economists guessed right.  Which means about 80% were wrong.  Which means the consensus opinion was wrong.  Typical for Keynesian economic projection.  Yet we still turn to them for their ‘expert’ opinion.  But it’s never their fault when they’re wrong.  There’s always something to blame.  And they sound so intelligent when they explain they were actually right.  It was just the market that was wrong.

Though several data points have bolstered the case for the central bank to raise rates, recent economic figures have not all been positive.

The latest reports for manufacturing, jobs, trade, housing and wholesale trade have been strong, while February gross domestic product and retail trade were weak.

In the past month, the bank has said several times it may have to withdraw stimulus from the economy…

A 3.2-per-cent rise in gasoline prices and 1.3 per cent in passenger vehicle prices pushed up the monthly inflation data, but this was tempered by an 8.2-per-cent fall in natural gas prices.

Could they be creating a bubble with those low interest rates?  Are people hopping aboard the Keynesian train and borrowing money at cheap rates to expand production?  And most likely inventories.  For if the consumers aren’t buying this stuff the stimulus is making it must be collecting somewhere.  Just waiting to turn profits into losses.  As the bubble will inevitably burst.  As all bubbles do.  Causing prices to fall because the stimulus created a surplus of unsold goods in the market.  Requiring deep price discounting to clear those bloated inventories.  Kind of like the price of natural gas is falling because there is so much of it on the market.  Thanks to shale gas and hydraulic fracturing.

It is interesting to note how much higher the inflation would be if it wasn’t for all that cheap natural gas holding it back.  Probably the one thing in the economy they’re producing to meet a real demand.  For consumers can skip the retail stores.  But they can’t live without energy.  Whether it’s the electricity they use (generated from natural gas).  Or the gas that cooks their meals.  Or the gas that heats their homes.  And their hospitals, universities, coffee shops, restaurants, businesses, etc.  Energy moves the modern economy.  And our personal lives.  So energy needs no stimulus.  But to encourage us to move into a bigger house we don’t need?  That takes stimulus.  It’s this inflation that exceeded the deflation in natural gas prices that gives them their overall increase in the inflation rate.  And why 80% of Keynesian economists guessed wrong on inflation.  Because they always do. 

So if you want to know what the best economic policy is for a nation just ask a Keynesian.  And then do the opposite.

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